3 Secrets to Results Driven Hotel Forecasting

Why an Effective Hotel Forecasting Process is Critical

A hotel just like any other business needs effective planning.

Planning is the process of setting targets to be achieved for revenue, expenses and profit.

Planning is established by the process of budgeting and forecasting.

In Part 1 of this 3 Part Series you learned about the 3 Secrets to Effective Budgeting.

Click below to read that before going through this Part 2 which is closely related.

What do you think is the difference between a budget and a forecast?

Are they the same?

You could say that budgets and forecasts are identical in some ways and different in some others.

Forecasts are subsets of budgets.

In other words, a smaller form of budgets.

With some key differences as well.

Budgets are for longer periods, normally a year.

In comparison, Forecasts are mostly on a monthly basis.

Critically, forecasts are adjustments made to a budget.

These adjustments are made as each month of actual performance is completed and recorded.

Hotel Managers often do not realize this important element of forecasts.

Your Current Month Performance affects your forecast for the future.

But it will not affect your budget.

Budgets are static.

Forecasts are dynamic.

3 Key factors underpin a monthly forecast:

• Original Annual Budget
• Year To Date Actual Performance (from your Profit and Loss Statement) and
• Projected Business Volume for the future months

See the image below for a visual understanding of this.

Since forecasts are dynamic and affected by actual performance, it is critical to have an effective, monthly process in place.

Let us now get into the meat of the blog post - 3 secrets of results driven forecasting.

The 3 Secrets of Results Driven Forecasting

Forecasting must eventually produce results consistently.

It is not an end by itself.

It is a means to an end.

It must help your hotel achieve its revenue and profit targets.

In order for that to happen, you must master 3 powerful secrets:

• Hotel Forecasting Secret #1 - The Lean Period Chokehold
• Hotel Forecasting Secret #2 - The Forecasting Period Syndrome
• Hotel Forecasting Secret #3 - The Cost Behavior Balancing Act

The above 3 secrets wield tremendous power.

They impact a forecast in its core function of helping achieve revenue and profit targets.

So, without further ado, let us jump right into them.

Hotel Forecasting Secret #1 - The Lean Period Chokehold

When your Business Volume Dips

One of the most difficult decisions to take in the hotel operation is relating to months when business volume dips.

It is when your occupancies come down sharply that some typical problems surface.

Before exploring that, let us first revisit some typical seasonality based situations.

In the six months of performance KPIs you see in this statement, seasonality is reflected in the three color coded manifestations of business volume - peak, lean and standard months.

Forecasting can be used as a powerful tool for projecting revenue, expenses and profit on a monthly basis.

However, it is easier said than done.

Consider first, that seasonality does not feature in a hotel profit and loss statement.

You can only take a ballpark basis using levels of occupancy which reflect the business volume of the hotel for the Rooms department.

This is where the power of having a seasonality criterion becomes evident.

For example, if say, the current month is a peak month, like May 2019 in the Paradise Hotel Statement with paid occupancy at 91% and you are forecasting for the rest of the year including the following month June 2019.

Notice how paid occupancy dives 30% points to 61% in June 2019. This has significant implications for revenue, expenses and profit.

To begin with, revenue is going to drop by $380,000.

While variable expenses will go down as well, however, the bottom line or departmental profit is reduced by a whopping $367,000. This is more than 90% of the revenue drop.

This is one of the most important elements of the occupancy trigger reflected through the seasonality factor in a hotel Profit and Loss Statement.

The lesson from this is more deep than even what the above mentioned drop in profit suggests.

It emphasizes the need for the forecasting process to identify the drop much earlier than just the month before.

More importantly, laying out a strategy to augment occupancy through raising business volume.

This approach can be applied to individual market segments to identify ones where the volume can be pushed up.

On the other hand, the situation is reversed when a lean month is followed by a peak month.

Here, the occupancy trigger plays a different role.

Here it is important to ensure that employee complement, supply levels are enough to bridge the gap between a 61% occupancy climbing to 91% in the peak month.

Also the peak occupancy will bring with it problems associated with a high volume operation.

This is for example, equipment breaking down (to be replaced or repaired quickly) and employees getting stressed out.

It will boil down to good planning and scheduling for varying levels of occupancy.

Hotel Forecasting and Peak, Lean and Standard Months

This is the reason why occupancy is such a powerful trigger for different levels of operation and the entire process of revenue generation, expenses incurring and profit retention.

Let us now see what are some typical problems of a lean month when occupancies are down appreciably.

To begin with, you must first ensure that your Variable Expenses Unit Costs are being utilized for good expenses management.

In a low occupancy month, you should be able to bring down your Variable Expenses as proportionately as is possible using Unit Costs.

Many hotels do not treat this with the attention it deserves.

Wastage, losses, pilferages are often discovered when a line item Variable Expense Unit Cost does not seem to show stability.

Watch out for this situation.

There can be no worse predicament than bleeding profit through variable expenses which are out of control.

Compare your lean month just gone by with an earlier one or the same month the previous year to discover any anomalies.

This is why a comparison with a previous year same month is priceless.

Unit Costs of line item Variable Expenses also throw up abnormal events.

For example, if there was a particular loss that was written off in the previous year, that Variable Expense will stick out when a comparison with the current year is made.

Be alert for these kind of outliers.

Hotel Forecasting Secret #2 - The Forecasting Period Syndrome

Which part of the year are you presently at is crucial in determining what is past and what can be influenced for the future.

What do I mean by that?

Let me explain.

Let us use a simple timeline.

This timeline is about how forecasts are influenced by which part of the year you are in.

Example

Say you are forecasting for the month of March (Forecast prepared in the first week of April).

Your Forecast will involve:

• 9 months of future projection and
• 3 months of actual performance

Assume that for the first 3 months of the year (January to March), you are behind in actual revenues and profit compared to forecast.

This means that Year-To-Date, your revenues and profit are showing a negative variance.

This also means that your 9 month forecast (April to December) must include something crucial.

What you ask?

Well, a strategy to make up for the shortfall in revenues and profits in the first three months.

Let us look at another scenario.

Assume you are forecasting for the months of January to September in October.

This means that your forecast will include 9 months of actual and 3 months of forecast (October to December).

This does not give you too much room for any adjustments you may wish to make for shortfalls in revenues and profits year-to-date.

So, what is the moral of the story?

The moral is: Be conscious of the period of the year you are in.

Hotel Forecasting Secret #3 - The Cost Behavior Balancing Act

Why Unit Costs rule budgets - The Expense Relationship Barometer

Let us visit a concept that as a hotel manager you come across daily.

The concept of expense behavior and categories

One categorization is about whether expenses are considered in accumulation as Total Costs.

Or when they are calculated per unit of business volume or Unit Costs.

Example

For example, take cost of consumption of cleaning supplies in the Rooms department for the month of December 2019.

They total up to $3,723.

These will be considered Total Costs.

However, say, the above Cleaning Supplies expense total is divided by the rooms occupied for that month.

That will result in a Unit Cost.

As in, expense incurred on Cleaning Supplies for every room occupied in that same month.

It is important to note that Unit Costs are normally calculated only for Variable Expenses.

With the above background, let us now see why unit costs will feature so heavily in your decision making.

You know that Fixed Expenses are those that do not move with business volume.

So, basically, a good chunk of decision making is related to Variable Expenses in the hotel operation.

However, there is an issue to tackle.

Variable Expenses keep moving with changes in business volume which is mainly represented by:

• occupancy and
• covers served

in the Rooms and Food & Beverage departments respectively.

Moreover, there is one more quirk to Variable Expenses.

They do not all move the same way.

Some are proportionate to the business volume and others are not.

That makes it difficult to have a measure that can be used as a benchmark for expense management.

Enter Unit Costs.

Unit Costs allow you to determine how much you are spending per unit of business volume.

Or per unit of occupied room night or covers served.

This is a powerful measure.

Since Variable Expenses as a total may not be useful considering how much they move with business volume, unit costs are the answer.

This is also the reason why unit costs are central in budgeting or forecasting.

Remember, budgets and forecasts are estimates.

They thus need a stable measure that will represent the differing business volumes.

Remember our discussion on peak, lean and standard months.

Action Steps You Can Take Right Now

So, the process of harnessing the power of unit costs to produce accurate budgets and forecasts are as follows:

• Categorize all your line item expenses in the Profit and Loss Statement into Fixed and Variable expenses
• Although in the real world, expenses often tend to be semi variable or semi fixed, it is important not to muddy the waters and create confusion; stick to fixed and variable
• Take each Variable Expense line item and determine whether it is in the Rooms or Food & Beverage (or other) operation
• If it is in the Rooms department, use occupied rooms or sold rooms as the business volume
• If it is in the Food & Beverage department, use covers served as the business volume
• Divide each line item Variable Expenses by occupied rooms or covers served for whatever period you are measuring performance
• Interpret the results - as in, see what the Unit Cost is showing
• Remember that when comparing a budget or forecast with an actual, the former are estimates
• See, if there are significant changes in unit cost numbers across months which normally should not happen
• Ironically, Unit Costs do not fluctuate too much across months although the Variable Expenses they relate to do

Unit Costs take away the hit or miss approach to expense management by providing a stable measure for Variable Expenses.

That is the reason why they rule budgets and forecasts so much.

For that matter, they generally rule actuals too!

So, you can see how understanding the 3 Secrets of Forecasting ensures the process is results driven.

How do you carry out forecasting in your hotel?

Are you harnessing the power of the 3 secrets.

Comment below.

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